How much deposit do you need for an investment property?

How much deposit do you need for an investment property?
Buying an investment property can be a great way to grow your income, but buying can be a hard task. Check out this article to see how much deposit you need.
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Buying an investment property can be a great way to grow your income, but buying one can be a hard task for many. Check out this article to see how much deposit you might need to buy an investment property, other costs to consider, and how you can use the equity in your current home as a helping hand.

Can you afford an investment property?

Buying an investment property can be a daunting task, especially in a housing market seeing strong growth. When house prices are at high levels, the upfront cost of an investment property loan also rises as you need a greater deposit.

However, coming up with a deposit is far from the only upfront cost. Investors are also subject to stamp duty, which can quickly rack up into the tens of thousands of dollars.

Once you’ve bought your investment property and find tenants, your rental income (in theory) should cover the cost of your mortgage repayments. However, the rental income is unlikely to cover all of the other costs you may incur, like body corporate fees, repairs and maintenance, utilities, property management fees, and insurance.

It’s vital you consider all of the extra costs that come with an investment property before buying. Review your current cash flow and see if your budget can handle the extra expenses that may come with being an investor.

Deposit requirements for an investment property loan

If you’re looking to purchase an investment property, it’s typically recommended you have at least a 20% deposit.

It can often be beneficial to have an even larger deposit, as in some cases lenders will offer you a lower interest rate for having a 30% deposit, for example. You’ll also pay less interest over the life of the loan, as you’re borrowing less funds.

If you have less than a 20% deposit, you’ll be required to pay Lenders Mortgage Insurance (LMI). This is because you’re considered a higher-risk borrower to the lender, and they need insurance to cover the cost of you defaulting on the loan. LMI can often cost tens of thousands of dollars, so its typically recommended you do your best to avoid it.

Why property investors often only use a small deposit

Part of the reason it can be difficult to buy any home is saving up for the deposit. It can be a long process for some people, especially if you’re opting to save for a 20% deposit. Often, property investors decide to buy with a smaller deposit, rather than taking time to save up.

This is because the interest portion of your monthly home loan repayments can be tax-deductible, as well as any fees associated with the loan. For example, if you accrued $15,000 interest over a year, and paid $500 in various monthly fees, you could claim $15,500 on home loan repayments for that financial year.

It’s important to note you can only claim on the interest portion of your loan, not the principal (the amount you borrowed). Want to know more about tax benefits of property investment, read our guide on tax deductions you can claim on an investment property.

Refinancing to use equity in your home for deposit

If you own your current home and you want to buy an investment property, you may not have to save for a deposit at all. When you pay off a home loan, you increase the equity you have in the home.

Equity is the value of the property minus how much you owe to the lender. You can refinance your home loan to access this equity.

For example, if you had $250,000 equity in your home and wanted to buy a $500,000 investment property, you could refinance to access $200,000 of your equity and use that as your 20% deposit.

Lenders typically won’t let you access all of the equity in your home so keep that in mind if you’re thinking of exploring this avenue. Find out more about using equity to buy an another property.

What other costs do you need to consider?

Being an investor and landlord can be expensive, long after coming up with the funds to buy the home. Some of the costs you may run into include:

  • Home and landlord insurance

  • Council rates

  • Body corporate fees

  • Land tax

  • Property manager fees

  • Repairs and maintenance

  • Advertising for tenants fees

You’ll also indirectly pay for the home and its contents depreciating but this can often be claimed on tax.

Keep in mind you’ll only earn rental income for as long as the home is tenanted, so you could be losing serious cash in the event the home is empty.

If you’re looking to purchase an investment property, see how much you could borrow with us using our equity calculator.

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Tags: buying an investment property | investment property

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